Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection

248 Pages·2015·1.74 MB·English

by  Joseph Belmonte

BUFFETT
and Beyond
SECOND EDITION
Uncovering the Secret Ratio for Superior Stock
Selection
DR. JOSEPH BELMONTE
Cover Design: Wiley
Cover Photograph: © iStock.com/Jezperklauzen
Copyright © 2015 by Joseph Belmonte. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
The first edition of Buffett & Beyond was self-published by the author.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Belmonte, Joseph.
Buffett and beyond : uncovering the secret ratio for superior stock selection/Joseph Belmonte.—Second
edition.
pages cm
Includes index.
ISBN 978-1-118-95577-2 (hardback); ISBN 978-1-118-95578-9 (ePub); ISBN 978-1-118-95579-6 (ePDF)
1. Investment analysis. 2. Securities. 3. Buffett, Warren. I. Title.
HG4529.B45 2015
332.63′22—dc23
2014043906
This book is dedicated posthumously to Tom Barnes, chief
engineer of the S.S. Yellowstone in 1978. Without him,
I would not be here to write this book.
To those of you who insisted that I write this book. To my wife,
Debby, who “forced” me to write the first edition and for Tula at
Wiley who insisted I write this second edition.
To my wonderful family who always stood behind me. Always. I
miss you, Dad.
And, of course, to both Jimmy and Warren Buffett. If you want to
live life on the beach like Jimmy, you have to learn to invest like
Warren.
Contents
Preface: From Then Until Now
Portfolio Insurance
A Dividend Income and Growth Portfolio
Introduction: A Sea Story
Luck
The Academic World
Risk
The Doctoral Degree
Chapter 1: The Purpose of This Book—Your Journey
Chapter 2: About Warren Buffett
Chapter 3: Determining the Earning Capacity of a Company (Now Really,
Can It Be This Easy?)
The Beach Factor
Clean Surplus
Determining an Efficient Company
Take Your Bank Account
Bonds
Earning Capacity
How to Determine the Operating Efficiency of a Company
Sooo Important
You See . . . ROE Tells Us Everything
Let’s Ask Warren
Summary—the Key to the Investing Business
Why Hasn’t the Entire World Figured This Out Yet?
You Will Learn
Chapter 4: My Theory of Why Most Money Managers of the World Cannot
Outperform the Market Averages
My Contest—Beware How You Select the Random Portfolio
One Step Beyond Buffett
You Don’t Have to Worry
Fun with Our Portfolio Reviews
In Summary
Chapter 5: A Very Simple Income Statement and an Even Simpler Balance
Sheet
The Income Statement
The Balance Sheet
Tying Together the Income Statement and Balance Sheet
Chapter 6: The Return on Equity Ratio
This Chapter and the Next and the Next
Chapter 7: The Return Portion of the Return on Equity Ratio
The Income Statement: Return
Chapter 8: The Equity Portion of the Return on Equity
Earnings
Accounting Statements and the Link between Them
The General Motors Story
The Central Flaw of Traditional Accounting
Let’s Not Forget the Main Question
Addendum to The General Motors Story
Chapter 9: How to Determine an Equitable Equity Number
Let’s Review Just a Bit
Our New Return on Equity Equation
What Does Warren Buffett Say about All This?
Chapter 10: The Predictability of Finance Valuation Models
Efficiency Is the Key
College and Finance Valuation Models— They Just Don’t Work Very
Well
Chapter 11: Clean Surplus ROE—the Only Comparable Efficiency Ratio
Clean Surplus
I Forget, What Are We Looking For? Let’s Review!
Chapter 12: What Buffett Looks for in a Company, or How Clean Surplus
Accounting Recognizes the Quality of a Company
Buffett
The Consumer Monopoly versus the Commodity Type of Business
The Commodity Type of Business: Companies Buffett Avoids
The Consumer Monopoly: The Type of Business Buffett Loves
Chapter 13: General Electric Then and Now
The Purchase Price
Back to Basics
A Very Important Point
Back to the Good Bank
The Account of Bank B
Beware, Beware, Beware
A Real Stock
The P/E Ratio
Back to the Future
Let’s Discount Back—the All Important Purchase Price
Important Note: Approximately
Very Important Addendum
Chapter 14: General Motors Then and Now
Let’s Look at General Motors
High ROE
Consistency Up to 2002
Compare
The Blind Kid—A Sea Story
A Lesson to Be Learned
So You See, Folks
Addendum to the General Motors Saga
Chapter 15: The Beginning: The Initial Research
Why Work with the Dow 30?
Constructing the Portfolio: My First Research into Clean Surplus
Methodology
1987: The Year of the Anomaly
Buffett the Anomaly
More Parameters: The Simple Rules
The Test Period Parameters
The Results
Compounded Returns
Is There a Correlation Between the ROEs and the Returns?
Getting Published in an Academic Journal
Chapter 16: Continuing Research: The Doctoral Research on the S&P 500
Finally, a Lead for Clean Surplus Accounting—Buffett, Graham, Ohlson
The Results of the Research
Methodology
Notice the Difference
Standardized Against the Market
Portfolio Construction
Results: First Test Period
Results: Second Test Period
Bias
Summary of Results
Chapter 17: Rules for Structuring a Great Growth Portfolio
Debt
Chapter 18: Great, Great Job, but You’re Fired
A New Definition
The Research Begins
The First Class
To Teach or Not to Teach?
Chapter 19: Stocks on Our Radio Show
Back in 2012
The Structure of This Report
Chapter 20: Stories of Audience Hecklers
The Know-It-All Half-Back
Chapter 21: A Great Dividend Income and Growth Strategy—Part I: The
Economic Spectrum of Dividend Stocks
Portfolio Parameters
The Four Stages of the Business Life Cycle
The Maturity Stage
Chapter 22: A Great Dividend Income and Growth Strategy—Part II:
Selecting Stocks That Are Growing Their Dividends for Our Portfolio
Chapter 23: A Great Dividend Income and Growth Strategy—Part III:
Selecting Stocks That Are Growing in Price for Our Portfolio
Philip Morris International
AT&T
A Pretty Good Portfolio Stock
Chapter 24: Enhanced Income
Covered Option Writing
What Does This Have to Do with Options?
What? Give Up My Stock? Shame on You!
A Bit of Technical Analysis
Chapter 25: Portfolio Insurance
What Does Buffett Do?
So What Can We Do?
Ok, So What Can We Do to Take the Guessing out of Investing?
The Amazing Thing about Portfolio Insurance
Market Crash Mentality
Back to the Crash Mentality
Which Scenario Do You Prefer?
How Do We Insure Our Portfolios?
Cash, Cash, Cash
But How Much Cash?
What Do We Mean by Market Conditions?
Chapter 26: What Have You Learned? A Summary
Dividend Income and Growth Strategy
Portfolio Insurance and Enhanced Income
Putting the Odds of Success on My Side
Chapter 27: We Won’t Leave You Out There Alone
www.wiley.com/go/buffettandbeyond
The Weekly Video
The Computer Program
Tutorial Videos
For Individual Investors
For Professional Money Managers, Wealth Managers, and Investment
Advisors
In Summary: I’m Still a Teacher
About the Author
Index
End User License Agreement
List of Tables
Chapter 3
Table 3.1
Table 3.2
Table 3.3
Chapter 9
Table 9.1
Chapter 11
Table 11.1
Table 11.2
Table 11.3
Table 11.4